Light sentence weakens U.S. offshore anti-money laundering efforts
US prosecutors planned to send a message to the largely offshore crypto industry this week about the cost of ignoring anti-money laundering (AML) laws at the heart of an important piece of financial regulation.
And they did, but it wasn’t the one they wanted to send.
On Friday, May 20, a federal judge sentenced Arthur Hayes, the former CEO of cryptocurrency derivatives exchange BitMEX, to two years probation and six months house arrest for years, but ignoring demands collecting and documenting the personal identity of customers. information necessary to comply with AML laws and the fight against the financing of terrorism (CFT).
The Department of Justice (DOJ) had requested six to 12 years in prison.
During his sentencing, Hayes said: “I deeply regret having participated in this criminal activity. My best years are ahead of me. …I’m ready to turn the page and start over. I ask that you allow me to return home remorseful and able to begin the next chapter of my life,” according to CoinDesk.
That’s exactly what he got, and what the Justice Department didn’t want.
Long an influential figure in the cryptocurrency industry, Hayes was charged along with two founders of BitMEX and an executive of the Seychelles-based exchange on October 1, 2020. At the time, then-acting US Attorney Audrey Strauss of the Southern District of New York, alleged that Hayes and the others “flouted” the law by operating “an allegedly ‘off-shore’ crypto exchange while willfully failing to implement and maintain even basic policies against the money laundering”.
“By doing so,” she said, “they would have allowed BitMEX to operate as a platform in the shadows of financial markets.”
Founded in 2014, BitMEX was one of the largest derivatives platforms in the crypto industry at the time of the indictment. While it fell to No. 22, according to CoinMarketCap, BitMEX still had a 24-hour volume of $841 million on Tuesday, May 17, when it launched its first spot crypto exchange. The new platform allows traders to buy and sell cryptocurrencies in addition to futures, options, and other derivative contracts.
In 2020, FBI Deputy Director William Sweeney Jr. pointed to a comment attributed to Hayes, in which he said the company was incorporated in Seychelles because the cost of bribing officials was “only ‘a coconut’ compared to the United States and elsewhere.
“They will soon learn that the price for their alleged crimes will not be paid with tropical fruits, but instead could result in fines, restitution and federal prison time,” he added.
The DOJ succeeded with the fines and restitution part, with Hayes and co-founders Benjamin Delo and Samuel Reed each agreeing to fines of $10 million, and new BitMEX management paying $100 million to the DOJ and the Commodity Futures Trading Commission (CFTC). It also hired German stock exchange CEO Börse Stuttgart and began implementing an aggressive AML policy.
But the real part of the indictment that really scares them, a serious prison sentence? Not really.
In Friday’s statement, U.S. Attorney Damian Williams said his office would “continue to vigorously enforce U.S. law aimed at preventing money laundering through financial institutions, including cryptocurrency platforms.”
Apart from the case against former Ethereum developer Virgil Griffith – who was given five years last month for violating sanctions while attending a North Korean cryptocurrency conference – the charges by Hayes’ LMA were the crypto industry’s most high-profile criminal prosecution.
See more: Crypto developer gets 5-year sentence for helping North Korea evade sanctions
And in February, the FBI announced the creation of a National Cryptocurrency Enforcement Team, with language making it clear that using crypto in money laundering is a priority.
“With the rapid innovation of digital assets, we have seen an increase in their illicit use by criminals who exploit them to fuel cyberattacks and ransomware and extortion schemes; drug trafficking, hacking tools and illicit smuggling online; commit theft and fraud; and launder the proceeds of their crimes,” Assistant Attorney General Kenneth A. Polite Jr. said in a statement.
Also Read: Will the FBI’s New Crypto Crime Unit Shatter the Industry’s Dominant Image?
The jail-free sentence comes as US regulators step up efforts to enforce the law. Most notably, Securities and Exchanges (SEC) Commissioner Gary Gensler nearly doubled the size of the SEC’s Crypto Asset Enforcement Team and Cyber Unit earlier this month.
Read more: These Bills Could Change the SEC’s Crypto Enforcement Trend
This follows a record $100 million fine accepted by crypto exchange BlockFi in February for selling limited-return crypto lending products. In the announcement, Gensler made it clear that the size of the settlement was intended as a message to the crypto industry.
“This is the first such case for crypto lending platforms,” Gensler said. “Today’s settlement makes it clear that crypto markets must comply with proven securities laws.”
Related News: BlockFi’s $100M Settlement With SEC Sparks Internal Discussion
That was likely a factor in rival exchange Coinbase’s recent decision — which surged a similar loan product last year after the SEC threatened legal action if it launched — to register in as an SEC-regulated brokerage.
More here: Coinbase registers with the SEC to avoid regulatory setbacks